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They Think You’re Stupid

New York Times columnist Daniel Altman wrote
about “Taxes and Consequences” after the election, fearing all
prospective changes in the status quo. His complaints with allowing
young workers to put part of their Social Security tax into
personal savings accounts were stupendously supercilious. He
demanded to know “who would choose where workers could put their
money?”

The elitism here is obvious. Like other New York Times
employees, Altman has a 401(k) retirement savings plan. So, who
gets to choose where he puts his money? He does, of course. So, why
does Altman presume other people are too stupid to make such
choices? It’s their money, after all.

But anyone who cashed-out a retirement savings plan in such an
untimely way would have to pay income tax on that lump sum, often
at a high tax rate. Prudent retirees instead avoid touching
tax-deferred plans until age 70-and-a-half, when they are legally
required to begin taking the money out. Only academics who ask
stupid questions would even think of rushing to liquidate life
saving during a cyclical crash such as 1933 or October 1987, which
were excellent times to be buying.

The money invested in any retirement saving account goes in over
many years and comes out over many years. What the stock or bond
market happens to be doing during the year one begins retirement
tells the retiree almost nothing about the next 10 or 20 years. The
stock market rarely stays down for more than three years, and then
typically rebounds quickly (as in 1983 or 2003). Meanwhile, the
value of bonds often rises in recessions when stocks fall (as in
2001).

Under a partly privatized Social Security system, potential
retirees’ incentives to tap the retirement account slowly would be
similar to existing 401(k) plans. Unlike old-fashioned Social
Security, there would be no artificial incentive to retire
prematurely at age 62 or 66, because the longer you keep investing
in your own account the more comfortably you can retire or partly
retire whenever you choose.

On Dec. 1, Wall Street Journal writer Tom Lauricella
chimed in with a front-page feature saying, “The Bush
administration wants to incorporate elements of the 401(k) approach
into Social Security.” But those who have such retirement savings
plans, he warned, “have made obvious mistakes in investing their
money, such as putting too much money into low-yield savings
accounts or betting the house on their own company’s stock. Many
also don’t put as much money into the plans as they could, forgoing
big tax savings and employers’ matching contributions.”

The first and last complaints are inappropriate; the one about
company stock is irrelevant. Those who put “too much money into
low-yield savings accounts” have a low appetite for risk, which is
as legitimate a taste as any other. To presume to instruct people
on how much risk they should take with their own money is no
different from complaining that other people buy the wrong cars or
drink the wrong wine.

This is a peculiarly ironic point to make in this case. Those
opposed to adding private choice to Social Security start by
suggesting that private retirement accounts are too risky, yet end
up complaining those with 401(k) plans don’t take enough risks.

The Wall Street Journal writer’s second complaint is
that “many don’t put as much money into the plans as they could,
forgoing big tax savings and employers’ matching contributions.”
That simply shows it is difficult to save, particularly for young
parents.

I once advised a young father facing a budget squeeze to
temporarily shrink his 401(k) contributions to the small percentage
his employer matched, because the alternative was adding to his
family’s debts. Most of us save little until the kids are out of
college. Yet 78 percent of those offered a 401(k) plan nonetheless
participate as well as they can, adding more later in life when
they can best afford it.

The academic complaint that few put the legal maximum into a
401(k) in any given year — $12,000 — sounds persuasive only to
those with salaries larger than the middling five figures most of
us earn, before taxes. Those statistics count me among the stupid
people who do not put the maximum into a 401(k) plan. But that is
because I already have more than enough stashed away in other
403(c), Keogh and IRA accounts.

Lauricella’s third complaint — “betting the house on their own
company’s stock” — is a red herring. In this case, his analogy
with employer-sponsored 401(k) plans breaks down completely. An
analogy with federal employee retirement accounts would be much
better. Private accounts funded with Social Security taxes are
not employer-provided plans, so employers will have no say
at all in defining which investments will be allowed. There is no
chance at all that such a federally designed system would allow
investing in any one stock, much less the stock of your
employer.

Altman somehow missed this distinction, too. He asks, “Would
they (who chose to invest part of their Social Security taxes) have
been able to invest in Enron?” Of course not. That’s another
startlingly stupid question.

Altman also asked, “What about investing abroad?” He must have
neglected to study the benefits of international diversification.
Unfortunately, Congress tends to share Altman’s provincial concept
of risk, so they probably won’t allow investing in a global stock
or bond fund, but they should. For equally paternalistic reasons,
the law does not allow holding short positions or “bear funds” in
retirement accounts (short-term bets stocks will fall), thus making
it impossible to hedge against periodic market downturns. In the
name of limiting risk, such restrictions on choice force people to
take avoidable risk.

The Wall Street Journal cites a study by an employee
benefit consultant claiming professionally managed 401(k) plans
earned a slightly better 10-year return than the do-it-yourself
variety — roughly 6.8 percent a year for the pros and 6.4 percent
for the amateurs. Since amateur investors in 401(k) plans managed
to earn 6.4 percent a year from 1992 to 2002, however, they
suddenly look a lot less stupid than Altman and Lauricella think
they are. That is nearly enough to double the size of a 401(k)
account every 10 years. And the professionals may well have been
taking bigger risks, since it wasn’t their own money they were
playing with.

Once younger people are given the choice to build such private
accounts under Social Security, an extremely competitive market for
professional advice will spring up to meet the demand because
millions of employees, rather than a few bosses, will be newly
empowered. But if Altman and Lauricella are still offering their
arrogantly ignorant investment advice, you’ll be safer sticking
with a do-it-yourself approach.